Retail Real Estate Reaches Lowest Vacancy Rates in 20 Years

The retail market is facing substantial challenges with a notable reduction in available space, particularly in high-quality shopping centers. The current vacancy rate is at its lowest in 20 years, highlighting the intense space constraints in the sector.

Absorption Trends

In the second quarter of 2024, the retail vacancy rate fell to 5.3%, marking a significant drop from previous years and indicating a rebound from the first quarter's negative performance. Despite slower growth in consumer spending, driven by increased reliance on savings and credit, real personal consumption grew by 2.4% year-over-year, and disposable income saw a 1.1% rise.

Shifts in Consumer Behavior

The Cushman & Wakefield report reveals an increase in credit card usage and a rise in delinquencies, with the personal saving rate averaging just 3.7%—a stark decline from 2019 levels. These trends may eventually lead to decreased consumer spending. There is also a noticeable shift towards discount stores, which are expected to represent nearly one-third of new retail openings this year.

Decline in Retail Space Demand

Demand for retail space has seen a drastic reduction, with absorption figures plummeting by 91% in the first half of 2024 compared to the same period in 2023. After peaking at 39 million square feet in 2022, absorption dropped to 18.9 million square feet in 2023 and stands at only 834,000 square feet year-to-date, suggesting this year might be the weakest for absorption since 2020.

Regional Insights

The South is leading the nation in retail space absorption, driven by Dallas/Fort Worth, Austin, Jacksonville, and Fort Myers. Positive absorption is also noted in Phoenix, Chicago, and the New York metro area. Conversely, the West has experienced negative absorption for the second consecutive quarter, with fewer than half of the markets demonstrating positive demand.

Construction and Supply Constraints

Retail construction remains limited, exacerbating the space shortage. The 9.8 million square feet of retail space constructed in 2023 represents a historical low, comprising only 0.2% of the existing inventory. With just 11.3 million square feet of retail space under construction, supply constraints are expected to continue.

Key Takeaways

Overall, rising rents and operational costs may hinder expansion plans and lead to more store closures. While there is a focus on open-air shopping centers, the broader retail sector may see top-tier malls investing in retenanting and capital improvements, while older malls might consider redevelopment to adapt to evolving market conditions.